The market has continued a headlong descent. It hit a new 52-week low yesterday and that signals a further slide is very likely. As of now, it's in a new zone and support calculations would have high error factors. On the upside, a short covering or value-based buying would start hitting resistance between 4,900 and 5,000.
The chart pattern suggests a slide till around 4,300 is possible within the December settlement. The long-term pattern is obviously bearish and so are the short-term and intermediate patterns. This is a historically heavily traded zone so for practical purposes we could assume that there will be support/ resistances every 50 points.
Renewed FII selling has pushed the rupee to historic lows. Many heavyweight stocks have also hit 52-week lows along with the overall market move and the breadth is also strongly bearish. This could be new and highly destructive downmove.
A breakout above 5,200 would be required to develop a positive intermediate outlook again. Barring such an upmove, we'd expect the market to slide further or to range-trade 4,700-4,900. The daily high-low swings should continue to be 100-125 points or more perhaps. The index will continue to open with big gaps.
The CNXIT has dropped to 5,850 and it will probably test key support in the 5,700-5,750 range again. The weak rupee could help this sector outperform the overall market. The Bank Nifty is looking much more bearish. If support at 8,200 breaks, the financial index will under-perform the broader market and lead it down.
Consider three possibilities. 1) A continued downslide could take the index down to 4,300 in the December settlement, with a succession of new 52-week lows. 2) A climb above 5,000 could mean a rebound till 5,200. 3) Range-trading may continue with a partial recovery and moves between 4,700 and 4,900. The rebound appears least likely.
The overall Nifty put call ratio is very bearish at 0.9, which signals that the drop could continue. The expiry effect is obvious. In the December series, Call Open interest is clustered at 4,700c (172), 4,800c (121), 4,900c (79) and 5,000c (49). December Put OI is clustered at 4,200p (35), 4,300p (48), 4,400p (66), 4,500p (90), 4,600p (119) and 4,700p (157).
Consensus expectations are therefore, between 4,200 and 5,000 and that's a fairly bearish prognosis. We could take fairly wide positions if we expect the volatility to remain high. Even a partial recovery could move till 4,900.
A bullspread of long December 4,900c (79) and short 5,000c (49) costs 30 and pays a maximum 70. The bearspread of long 4,500p (90) and short 4,400p (66) costs 24 and pays a maximum 76. These are attractive risk:return ratios, given the potential intra-day range of 125 points. Either spread could be hit inside two or three sessions but the bearspread has the better ratio.
As it happens, the index is practically at 4,700 so any opposed set of calls and puts would be zero delta and hence, low risk. But a long-short strangle combining the above would cost 54 and pays a maximum 46. The ratio is not so attractive with breakevens at 4,446, 4,954. A smart trader may be able to exploit intra-day swings to get this position cheaper however. If you want positions closer to money, you'll have to wait till after settlement.
